Hotel leaders project slow path to recovery
Hotel leaders project slow path to recovery
26 JANUARY 2010 7:44 AM

ALIS panelists said the lack of group business will hurt hotels as the industry looks to shake the doldrums, and that transactions will be inching back into the mainstream as 2010 moves forward.

SAN DIEGO—Group business was the driver of the horrendous year that the hotel industry experienced in 2009, and leaders on a general-session panel at the Americas Lodging Investment Summit don’t see any hope of a recovery until that same business returns.

“The biggest surprise for us was the unbelievable decline in group declines and cancellations,” said Ed Walter, president and CEO of Host Hotels & Resorts. “That’s one of the things we typically count on to prop up our performance.”

Gary Mendell (left) and Jay Shah discussed recovery at a leadership panel at the Americas Lodging Investment Summit.
Gary Mendell, CEO of HEI Hotels & Resorts, said the many group-business cancellations in 2009 were unexpected—his company’s hotels experienced an 18-percent drop in group occupancy rate and a 1-percent drop in transient business occupancy.

Mike Shannon, managing director of KSL Capital Partners, said hoteliers should brace for an even worse scenario for group business during 2010.

“In the group market, the pain is yet to come,” Shannon said, adding last year’s decline was buffeted by cancellation fees, and group business won’t hit bottom for the next six to nine months.

Walter said he is optimistic there will be a recovery in group business, and the company is positioning its portfolio to attract that group component. He added he’s most concerned with the lack of high-priced corporate bookings. He said that type of business hasn’t reached new heights since its peaks during the 1990s, and he doesn’t see it returning in the near future.

But that doesn’t mean the panelists aren’t planning on a recovery occurring sometime sooner rather than later.

“There are some characteristics of this recovery that will be pretty distinguishable from past downturns,” said Jay Shah, CEO of Hersha Hospitality Trust. “This one is the high unemployment.”

“It’s hard to argue against a muted recovery,” said Tom Baltimore, president of RLJ Development. He said 2 million jobs were lost during each of the past two recessions, but that has reached 7 million during this downturn. Add to that the 15 million homeowners who are upside down on their homes, and it equates to a chaotic future.

The bright side

Walter said the bright side for the industry is that after this year, supply growth should be fairly nominal.

“With low supply growth we’ll clearly have demand growth,” Mendell said. “In the last two recessions, we were coming out of the recession with occupancy at 60 (percent) and 63 (percent). This one we’re coming out at 55 (percent), which is unprecedented. It’s never been this low.

“You’re not going to have pricing power until you get (occupancy) in the low 60s,” he said. “That’s going to take three or four years.”

Shannon said there are some events that have to unfold that will detour an immediate recovery. He called it the “caterpillar economy” because there are a lot of shoes and only some of them have dropped.

Shannon also beat up the government regularly during his comments, saying it has put up an umbrella with its financial bailouts but doesn’t see the rain.

“There are more shoes to drop,” he said. “As the private side recovers, the government side is getting worse and worse and worse. … We’re hiding under the government umbrella, and we’ll see a slow recovery because of it.”

Baltimore said the government must do a better job of creating jobs if there is to be any recovery in the short term.

“Part of the problem we face from the government perspective is the agenda was so ambitious and there’s so much left to accomplish,” Walter said. “As a businessman, we’re not clear what the rules are going to be. When you proceed cautiously, that typically doesn’t involve hiring people; that typically doesn’t involve more investment.”

Debt and opportunities

But investing is what these leaders do best, and each of them said they expect to have more rooms in their portfolios at the end of 2010 than they have at the beginning of the year.

“Why would you ever want to sell in the worst market since the depression unless you had to?” Shannon said.

“As we look at the space today there are more attractive debt opportunities, if you can find them,” Baltimore said. “Dislocation on the debt side provides a unique opportunity to provide senior debt at almost synthetic equity returns.

“We continue to look for asset acquisitions,” he added. “The stress in the business will turn to distress. There will be opportunities, perhaps not as much as we all thought a year ago.”

Mendell said HEI is looking at debt transactions all the time, but most hotels are worth less than the debt.

“More owners are going to have to sell,” he said. “Our goal is to buy (US)$300 (million) or (US)$400 million worth of hotels. That’s six to eight hotels. … We’re all feeling a little more deal flow than we did six months ago.”

Hersha recently finished raising US$155 million through a secondary offering. It is acquiring two hotels in New York’s Times Square with the proceeds. Shah said the capitalization rate is 8 percent, and the company expects the assets to stabilize at around a 12-percent cap rate by 2014 when company executives expect the next cycle to peak.

“There’s going to be those select opportunities where you can make it happen,” Shah said.

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